TrackInsight: End of Cycle?

December 11, 2018

The first week of December was a very tough period for equity markets, leaving investors groggy and bruised by the flood of bad news. The rebound at the end of November fizzled out quickly as Trump reignited trade war fears, after Huawei’s CFO Meng Wanzhou’s arrest by Canadian authorities, and the yield curve between U.S. two-year and five-year T-notes inverted for the fist time in more than a decade. Historically, an inversion of the yield curve has often been a bearish signal for the U.S. economy and has helped predict recessions. In any case it reflects growing risk aversion since investors tend to invest in long-dated bonds (10-Year US T-Note yield: 285bps ; 5-Year US T-Note yield: 269bps) rather than short-dated bonds (2-Year US T-Note yield: 271bps).

The Dow Jones Industrial Average fell 4.5 percent over the week, while the S&P 500 sank 4.6 percent. The MSCI World (USD) was down 3.73 percent and the MSCI EMU slid by 3.67 percent. Chinese indices did a little bit better (MSCI All China+HK+Taiwan : -1.08 percent).

The downturn was widespread. Most of the 10 major market sectors were firmly in the red, with the largest losses coming from financials (-7.08 percent WTD, as a continued inversion on parts of the Treasury yield curve is seen as headwind for banks which were thrown into further turmoil after Citigroup hinted at a profit warning on Wednesday), industrials (-6.29 percent with some bellwethers such as Boeing and Caterpillar entering a spiral dive: -6.79 percent and -8.93 percent WTD respectively), and materials (-5.11 percent). In this hostile environment, utilities (+1.34 percent) and information technology (+0.77 percent) were the only groups to finish the week on the positive side of the ledger.

Elsewhere, oil prices showed some renewed life, with WTI crude rising 3.3 percent to $52.61 a barrel. The move came after Saudi Arabia and its allies led by Russia announced that they had agreed to a production cut of 1.2 million barrels a day.